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The Tactics of Strategy in a Mid-sized Business

June 3, 2009

“The more precisely the position is determined, the less precisely the momentum is known in this instant, and vice versa.”
Werner Heisenberg, Uncertainty Paper, 1927

There were only a few months to go until our March 31 year-end, and we had planned a meeting with our corporate attorney to tie up a few loose ends. For the moment, as Jon Peacock and I rode together down Minnesota Drive toward downtown Anchorage, our eyes were fixed on the horizon. Bathed in the alpenglow of mid-afternoon, the city and surrounding mountain scenery had stolen our attention. OurAnchorage in Alpenglow schedules were so interrupt-driven at the office, that the drive and the view were a welcome escape — a 15-minute vacation.

It was hard to believe that nearly two years had passed since our entrepreneurial journey began. Right from the start, we were swept up by a breathtaking pace as our associates went into an emergency response mode to support the State of Alaska after the Exxon Valdez disaster. With no more than a simple signature on a hastily written list, our computer inventory was essentially commandeered by State of Alaska employees. Every available technical resource we had was assigned to support the State agencies as they dealt with the environmental catastrophe in Alaska’s Prince William Sound.

Not all the work was animated by as much passion, but nevertheless it was critical to our progress. Our sales team in Fairbanks leveraged the last vestiges of provincial bidding preferences along with our good reputation with the University of Alaska and landed a large multi-year contract. New regionally exclusive K-12 and higher education distribution agreements were executed with Apple and IBM. In our second year, we assembled an all-star statewide team to bid the State of Alaska contract, and their efforts were rewarded with the dominant position on the State’s technology catalog. IT engineering projects at both Arco and British Petroleum were started. And a public relations breakthrough was developed. We successfully petitioned our computer manufacturer partners to repurpose our advertising coop funds to allow us to acquire and donate large computer labs to the University, which produced very favorable statewide press.

There was much more. Our largest office was relocated into a 12,000 square foot space. Loan and credit facilities were successfully established and expanded. Administration and accounting were centralized and automated. Business process was streamlined and control points were established. We were writing off inventory and depreciating assets at nearly 350K per year. Even with the inventory write-downs, the annual million dollar losses prior to acquisition disappeared. We were profitable and producing enough cash that the convertible subordinated debenture held by GCI would soon be paid off to the surprise and delight of their chief financial officer.

And after the initial set of staff changes, the mood of the workforce improved dramatically. It was showing in large and small ways. The signs of pride and extra effort were visible everywhere. Their cars were filling up the parking lot early and were still there well into the evening. The esprit de corps was more than apparent in what had become our traditional Friday after-hours gathering to wind down the week, and at the holiday parties and the summer picnics. Spouses and children were coming by the office for potluck lunches. The employees were challenged and having fun again.

We shared some of this upbeat report with our corporate counsel, Steve O’Hara. Steve followed our update with the details of a buy-sell agreement he had designed; and we discussed the cross-beneficiary life insurance coverage for the principals necessary to support that agreement. He then pointed out that with all the good news, he was disturbed with one aspect of the story we had just shared. We listen to his strong opposition to our Friday in-office employee happy hour that I had inadvertently mentioned. Needless to say, after a vivid description by Steve of the ridiculous risk we were taking with that “tradition”, it ended on advice from counsel.

As our meeting wrapped up, Jon and I buttoned up our wool overcoats and marveled at Steve’s 9th story view of the intensifying sunset. The sun had already been down for over an hour, but as the stars Denali after sunsetemerged, the winter sun continued to illuminate Mt. McKinley with a deep rose-colored hue. We walked down to Jon’s car, pulled the parking ticket off his windshield, and I listened as he argued for variance to company expense policy on the matter of parking violations caused by overly talkative partners. To settle the matter, we decided to go to dinner at Jon’s favorite restaurant, the Marx Bros Café to catch a remaining glimpse of Mt. McKinley and further company discussions.

As we settled into our wine selection, hors d'oeuvres, and conversation, Jon asked, “Have you heard of Werner Heisenberg, the German physicist?” This was not an altogether surprising subject coming from Jon, since he had earned a Ph.D. in physical and computational chemistry from UC Irvine. He explained his question, “Heisenberg famously stated in 1927 that when it comes to atomic particles “The more precisely the position is determined, the less precisely the momentum is known…” Today, that is known as the Heisenberg Uncertainty Principle.”

I thought myself, oh boy, here we go, and I poured another glass of wine. Jon then initiated the conversation that literally changed everything.

“Tim, there are all sorts of fun corollaries to Heisenberg’s Uncertainly Principle, but one in particular relates to business strategy and tactics. Heisenberg’s business corollary might be, ‘The more you know about where you are, the less you know about where you are going, and vice versa’. The point is actually a serious one. If you evaluate the overwhelming tactical execution pace we have been engaged in over last two years, our success has a trajectory. Think of this trajectory as a classic business bell-curve.”

“Okay Jon, I think you may be referring to the product life-cycle curve with “embryonic” and “rapid acceleration”, “market maturity” and “decline” phases.”

Jon confirmed, “Yes, that is it. But I think there is a similar bell-curve for every business model – including our business model. To your point, the bell-curve for our business model may be the compilation of all the service practice and product bell-curves. Anyway, one way to think about part of our respective roles is it is our job to optimize the firm’s performance on this trajectory, this curve.”

Then Jon asked the central question, “Do you think we are spending enough effort determining when to change from the current business model to the next?”

Not entirely getting his direction quite yet, I asked, “Jon, what are you thinking about changing now? We have virtually changed everything over the last two years — and the business is growing rapidly, we are profitable, and we are producing cash. Everyone is working at full throttle. I don’t think we have the mindshare to change a thing right now.”

“Tim, I think we may be talking at cross-purposes, but in a way you are making my point. To answer your question directly, there isn’t anything we are about to change; and it is quite predictable that everything eventually will change. What I am suggesting is when we are both enveloped in the tactics of optimizing the model we are in, especially when all is seemingly going well; it is hard to see the imperatives for change to a new state. And my point is the opposite is true as well. If one were entirely enveloped in the effort of business strategy or determining the next state, it would be hard to tune into the tactics and timing of optimizing the current business model.”

Jon really had me leaning forward into the conversation now, so he just pulled off another contextual layer. “If we are going to succeed with this business over the long term, I think we are going to break and recast our model many times over the next decade. It is my opinion that if we continue to simply split all the tactical roles between you and me; we will both get swept up into the day-to-day optimization of our current model. That is actually a serious problem because it is impossible for one executive in our industry with a company this size or larger to focus on the future state, while simultaneously concentrating on optimizing the present state. I think there will be two artifacts of this approach, and both are a concern. First, no matter how carefully we divide the responsibilities, we will find ourselves working at cross purposes. And, the greatest risk of all is that we will miss the next critical strategic step.”

Now that it was apparent Jon was leading the conversation toward a reorganization of responsibilities, I jumped ahead and asked a number of specific questions. Instead, Jon took it back a notch. “Tim, a rising revenue line for a business over time is actually made up of bell-shaped curves that were changed into a sequence of “S curves” by cutting off the model’s decline stage, or the right half of the bell. Changing bell-curves into S curves comes down to knowing when to jump from one curve and onto the next. Picture a sequence of four or five business models side by side. To echo your point, each successive business model is a bell-curve that moves through an incubation phase, a rapid acceleration phase, Time to Sales Dev Intro Growth Graphmarket maturation phase and a decline phase. Now think of each successive business model as having the potential to drive to higher levels of revenue at maturity, and produce a much better return on capital. It just wouldn’t make sense to optimize one model, ride the back half of the curve down while destroying capital and workforce, and then step on to the next model after the financial resources and team are depleted. Instead it makes more sense to leap from one business model to the next just about when everything is going well, and manage the risk and effort with your best people and available capital. Still, the immediate impact of a leap can be a performance decline. But done right, this disappointment curve will be followed by a quick recovery and a new, higher, optimal state.”

“If we are both responsible for the current state,” Jon said, “we will see solutions only in the context of current state. You like to say that our industry’s change rate is being driven by Moore’s law. If so, it may be the case that any optimized business model may be effective for less than 18 months. If we wait four quarters to react to a decline of any current model’s momentum, my view is change may come too late.”

Now I understood where Jon was heading. So I asked how he saw us dividing up the tasks.

“I am suggesting we stop splitting the tactical leadership 50-50.” He explained, “I trust your ability to execute — you always find a way. Your job will be the current state…to organize, optimize, and communicate. You are already at capacity in my view, so we will need to invest in you doing even more. I think the answer is to provide you more staff so this can be accomplished. In turn, I will focus on the next state. When everything seems to be going right, but growth rate is changing, or your efforts seem to stall, it will pay us to have the next state formulated. My job will then be to break the status quo by forcing us to the next state. Once a strategic decision is agreed to by the board, the plan is defined, and we have taken the first steps, then you will again be responsible to implement and optimize what would then be the new current state. Between the two of us, we will create a perpetual loop of learning the next state, applying change, optimizing, and repeating the processes again.”

We finished the memorable conversation and dinner at the Marx Bros Café with a toast to Werner Heisenberg and his Uncertainty Principle.

The next day, Jon brought a gift – a copy of the May-June 1990 HBR issue. There was no doubt on first glance it was a classic. In that one issue there was an article by Peter Drucker, another by Gary Hamel and C. K. Prahalad on “The Core Competence of the Corporation” and an article by John Kotter titled, “What Leaders Really Do.” Peacock’s Heisenberg corollary was the perfect lead in to Kotter’s research. In Kotter’s piece, he emphasized that managers and leaders are complementary. Managers promote stability and optimization of existing state, and leaders press for change to future state. To take advantage of our respective natures and interests, we divided up the tasks according to our preferences that Kotter had neatly segmented into the two roles. We repeated that exercise every few years to keep it interesting for each of us.

Most importantly, we accelerated our leaps from one S curve to the next. The impact was almost immediate. Our firm broke into the top 49 Alaska-based businesses. We continued to rise up the ranks of Alaskan businesses to the top 15 until we moved our corporate headquarters from Alaska to Arizona. The following year, in addition to being recognized as Alaska’s “Business Leader of the Year“, our firm was recognized as national business of the year by our franchisor. We soon earned a place in the top 50 of the “VAR 100” from 1994 forward as one of the fastest growing value added resellers in the US marketplace. Over the course of time, we eliminated our retail division, focused on our most profitable market segment — clients with an installed base between 300-5000 computers, consolidated our Alaska locations into the Anchorage office, developed nine distinct IT service practices organized around our mid-enterprise clientele’s IT service requirements, and opened or acquired new offices in the largest cities of Oregon, Washington, Maryland, Northern Virginia, Northern California, and Arizona. Our revenue grew from 9.1M to 250M. And in the winter of 1997-1998, before the collapse of the Y2K and dot.com bubbles, we found a way to sell our business to a Fortune 500 company at its peak value for 11x earnings.

Werner Heisenberg’s Uncertainty Principle gave us the guidance to effectively divide the duties of our executive team along the lines of “where we are” and “where we were going”. As a result of that structure, in an industry with rapidly changing fundamentals, we did a better job of optimizing to both current and future state.

Please add your comments.

©2009 Ancala Equity Partners / Timothy P. Fargo all rights reserved
Next Week: A strategic epiphany.

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Get Off Your High Horse: 15 Ideas to Develop a Merit-Based, Results-Oriented Company Culture

April 24, 2009

“Executives and owners are simply employees of the company and therefore subject to the same policy and procedure endured by any associate.”
Sometimes the Bull Wins

The Lead Up to the First All-Hands Meeting
Once my eyes adjusted to the change from a Fortune 50 firm to a small regional business, I quickly recognized there was a solid list of apparent and overlooked positives. The company had many strong client relationships. The team was deep with talent; the top tier of associates could have played at any level of the industry. It was a lot of fun being around the employees; there was a natural camaraderie and a rich jocular style that comes with a young demographic mix. And beyond their doubts and concerns, I sensed the associates were ready to commit.

The real central question was the one on their minds: Was their employer viable, well-led, and worth a career commitment? The associates were right to have been harboring concerns about the company’s future. Cash had not been generated for two-plus years. The last audited financial for FY1988 indicated the losses had exceeded $1.2M. There had been a number of layoffs. Job security and the company’s survival was on every associate’s mind.

The root cause of most business failure is found somewhere in the mix of strategy, structure, and business process. The final symptom of failure is a working capital collapse. However, for employees the impression is less academic. Serious financial stress in a company is experienced by the rank and file associates as a values crisis. Commitments that had been made are not met; which calls into question the credibility of key executives. While budgets are slashed, and jobs are disappearing all around, employees are no longer sure what the organization stands for or believes in. Long-term office alliances and relationships are strained while associates compete for job security. In an organization in decline, it is easy to personify problems that find real root in business fundamentals. This is especially the case for young people who have not experienced the ups and downs of a business cycle.

To reverse the decline, an organization needs (1) a transfusion of working capital, (2) an effective strategy and viable model, and (3) reestablishment of a merit-based, results-oriented culture. A week into my new role, Jon and I were starting to wade into that sequence. That is when I scheduled my first all-hands meeting.

The objective of the meeting was not to make my introduction — we instead wanted to organize my comments around their interest — “security”, “career” and “opportunity”. With this group I knew my tone needed to be both light and serious. One objective for that meeting was to shift focus from the past. I wanted to legitimize how they were feeling, while challenging the team to move forward. Unfortunately, a sequence of former executives had made a practice of disparaging predecessors. I had never seen the value in judging predecessors. Beyond poor taste, there are at least three reasons why this is a bad idea: The criticism is usually inaccurate and out of context; there is no gain – in fact predecessor blame is counterproductive; and it is bad karma — since we will all eventually be part of the emeriti. It was important for me to get the associates’ energy out of the past — and I thought I may be able to have fun expressing that view.

The First All-Hands Meeting
At the beginning of my comments, I made a few lead-in points:
• It is a privilege to be part of the team. I know good talent. It is obvious to me the culture is rich with tradition, and the team is deep in ability. I have worked in award-winning Fortune 50 branch offices my entire career and this organization could compete with any of them.
• Their sacrifice has been crucial to our survival, and hasn’t gone unnoticed. All should be proud indeed of the collective efforts.
• Our firm has made it nearly to the end of the recession because of those efforts. There is tremendous opportunity for the firms that will make it through. If we push to the other side, with this talent we have a chance to go on a run that this team, our competitors, and the market would not soon forget.

I knew the audience was curious about my management style, so I let the group know I had a cautionary tale to share about my viewpoints on management. With a smile, I leapt right into the tale:

“An executive had been recruited to be the new president of a regional high tech product and service company. As he walked into his new office, his predecessor was just leaving holding a box of personal possessions. Startled, they exchanged strained cordialities. The outgoing exec broke the ice and said, “Listen, I wish you the best of luck. I know you probably don’t need any advice from me, but just in case it helps, I have left three envelopes marked “#1”, “#2” and “#3”. I placed these out of the way in a hanging Pendaflex folder in the credenza drawer. If you want — open these one at a time when you confront a crisis.” He quickly ducked around the corner and exited the business.

The honeymoon went along smoothly for the new president, but four months into his role, revenue plummeted unexpectedly. Working late that evening, with a slight bead of sweat pouring off his brow, the president came across those numbered envelopes. He took out the envelope marked “#1” and opened it. The message read, “Blame it on your predecessor.”

The president acted. He called his managers together, and with nuanced cleverness, he laid the entire blame on the previous president. From this point forward, things were going to change. The old style was out — things were going to be different. Old meetings were cancelled and new meetings defined. Team building, rope courses and performance coaches were introduced. People learned about each other’s communication preferences. Favorite business books were distributed. Revenue cycled up, and the crisis passed.

All went along well. However, about a year later, the company was again experiencing a revenue decline. Yet the crisis was compounded with a serious expense control problem. Late one night in his office, in a deep state of panic, the president recalled those envelopes. He hurriedly ripped open envelope “#2”. The message simply read, “Reorganize.”

The president jumped into the task. He brought the team together, announced he was moving the managers around to new roles. He renamed all the departments, changed all management titles, and “sales representatives” became “territory managers”. Fast-trackers were identified, and company mentors were assigned to them. The president then developed a presentation with the new org charts and visited every team to tell the story. The chairman and the board congratulated the president for his insightful efforts. Revenue cycled up, expenses fell back into line, and the crisis passed.

After several consecutive profitable quarters, the company faced a third crisis. Revenue declined, expense increased out of control, clients were concerned with delivery and quality, fast-trackers — fed up with “being mentored” — resigned, and projects were neither on-time nor at budget. The president went to his office late that evening in a cold sweat, closed the door and opened envelope “#3”. The note said, “Prepare three envelopes.”

The crowd burst out in laughter. The story was good therapy. The team appreciated the self-deprecating message about my station, and by synching up with their doubts, I was developing credibility. Most importantly, my message inferred we were going on an altogether different journey.

It was time to introduce the ownership structure of the soon to be carved-out entity. I started by asking if any in the group knew the difference between the words “committed” and “involved”. A number of hands went up, and someone spoke out, “The hen was involved in the ham and egg breakfast, but the pig was committed!” Then I announced, “The revolving door of leadership has stopped. Jon and I signed over everything we own, and executed agreements to buy 50% of the firm each. We are all the way in – we bet the farms on your success.” I emphasized that Jon Peacock was not just the other 50% shareholder, but an individual I admired more than any I had met in my career. I was proud to call him my friend and partner. His reputation across the community was stellar and it was his leadership that kept the creditors and vendors positioned to support our new business. “We are committed to your security and careers and this firm’s future.”

In the interest of drawing their attention to the future, two far-fetched goals were identified. I said, “As you walk to your cars after our meeting, look down Old Seward Highway and spot the top of British Petroleum’s building through the trees. BP and the others like it are the type of accounts we are going to pursue and capture. We are definitely heading up-market.” In addition to an “up-market” focus, I followed with the point that our top line mix was going to emphasize higher levels of service revenue content. We were going to chase large-scale, long term service projects in corporate and institutional accounts. A five sentence version of our new business positioning was handed out to make it easy for all to understand and explain.

To begin the wrap-up, I emphasized to the group that their expressed concerns were appreciated and understandable. We would be making critical changes in the next 90 days that they could count on, including: Leasing a new upscale office within three months, and securing substantial financial commitments from the largest bank and the fastest growing telecom company in the state. I asked that they write those promises down and hold us accountable to the commitment.

I finished my first meeting by saying, “We will need a little more of your indulgence — we won’t fix all the problems tomorrow. You will see profound change in the coming weeks and months. But don’t take long to buy in — as much as you have already given, I have to ask more from each of you. Your support, confidence, and attention to the little things are needed in extraordinary measure. Your collective commitment will create the critical momentum. You can trust that it will pay off in better job security for all, interesting career paths in the future, and a professional journey you won’t forget.”

We got a great response from the associates. Now it was time to meet our list of promises. We were not taking a chance on our credibility. Jon had been architecting the credit relationships, the stock purchase agreements, leases and floor plans. We had a high confidence we would get all of these objectives accomplished.

15 Ideas for Small and Mid-Sized Businesses to Impact Culture
Jon and I collected a number of values, recommended acts, and insights from our conversations and readings that we intended to embrace in the new “corporate culture”. Listed below are 15 of those ideas.

1. Owners and executives are simply employees of the company and therefore subject to the same policy and procedure endured by any associate.
2. Principal’s intent on building shareholder value should take conservative salaries, and reinvest earnings in the company.
3. Avoid the appearance of privilege. Principals of emerging enterprises should look conservative. New cars, fancy offices, Rolex watches, and Armani suits produce unintended consequences.
4. People notice hypocrisy. Principals should set the standard for work ethic; at least collectively, principals should be at work the earliest and stay the latest.
5. Executives don’t really need a big office. The manager with the most direct reports should get the largest office, along with a table and chairs. Conference room usage will be more efficient that way. And get rid of the stuffed blue marlin on your office wall. It sends the wrong message.
6. Vendor benefits, gifts, and prizes are not for the ownership team or salesperson. These SPIFs (i.e. special product incentive fund) are best applied to the company and/or for the employee reward and recognition programs and distributed based on merit. SPIFs should not be distributed to the principals for their personal use.
7. Culture is the collective of what the organization stands for and what it believes in; the central beliefs and attitudes. A practical definition of company culture is how employees act when management is not around.
8. Cultural health can be gauged in part by each employee’s understanding of their purpose in the context of the plan; their self-confidence to act to achieve that purpose; and belief that good performance will be recognized.
9. Eliminate bottlenecks and increase the degree of freedom. Performance happens if associates who know their jobs – and have the freedom to do the job – are matched with an intelligent plan that has room for innovation. In this environment, the business will grow, job security will improve, careers will advance, and associate confidence in leadership will be earned.
10. A motto, business principles, and mission statement will produce widespread cynicism if there are significant differences from common perceptions. What may work better is to lay out the strategic positioning and the tenants of the business plan in five or less simple sentences. Once everyone buys in — delegate.
11. Organize the company around recognition events. Hold regular meetings for the employee workforce. Reward and recognize associates publicly and often. Create ritual around reward and recognition. Also reward employees for telling you what is broken; then think of ways to have fun with the discoveries. Fix the processes causing issues.
12. “Egalitarian” and “more” recognition will work well. “Inner-circle” and “less” recognition will not work at all. If you are a principle or key executive, tell your direct reports that unfortunately their positions will have to be public recognition enough.
13. Take a sincere interest in the employees. Be approachable. It is more enjoyable to be involved at this level.
14. Get the organization involved in the community and in charitable organizations. It brings meaning to work, creates opportunity for camaraderie, and good community association.
15. Have informal non-business gatherings including picnics, potlucks, and holiday parties. Dispense with speeches about the business at these events – and make sure you thank the spouses and their loved ones for their indulgence and understanding.

Please add your own ideas to the list and share your comments.

©2009 Ancala Equity Partners / Timothy P. Fargo all rights reserved
Next Week: The tactics of strategy.

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Back from the Brink: 7 Steps to Business Recovery

April 15, 2009

“For Heaven’s sake heave out the ballast!” “There! the last sack is empty!” “Does the balloon rise?” “No!” “I hear a noise like the dashing of waves! …”
Jules Verne, Mysterious Island

For the first decade of my career, I had worked in branch offices of a growing, “Fortune 50” information technology company. I was not prepared for the transition I was about to experience. The moment I decided to take on the new entrepreneurial opportunity, the exhilaration of being recruited was suddenly over. On the appointed morning, I resigned and left a multi-storied, concrete, steel and glass office building, and drove out of my heated underground parking garage for the last time. Five minutes later I arrived at a lot next to the Fireweed Theater. My new business was located in what only could be described as a run-down strip mall.

Well before I met an employee, I knew that there was little enthusiasm left in the workforce. As I walked across the parking area to enter the store, I picked up a crushed coke cup and popcorn tub discarded by a theater patron. Then I noticed the retail stores’ 20 foot high outdoor changeable-letter sign; there was no message on the sign for the passing traffic. I opened the door and could see computers on display that were obviously not demonstrable. I didn’t know much about the retail computer business, but I knew that these were not indications of esprit de corp.

My partner introduced me to the sales team leader as simply “our new president” — we skipped the ownership description for later. Jon quickly headed back to our corporate office, and the sales manager took care of the rest of the introductions. I spent most of the first day in one-on-one meetings with our associates. I could tell that energy had to be mustered by most associates for a conversation with the “new guy”. Eye contact was hard to come by; employee attitudes seemed to range from deeply pessimistic to cynical. This was no surprise; those remaining on the payroll had endured a multi-quarter cash crisis, a sequence of layoffs, pay freezes and reductions, and a number of executive transitions. The more imaginative staff members were working on theories to explain why I had left such a fine career to join this organization, and whispering about how long I might last. The same thought may have crossed my mind.

Jon Peacock and I met late that afternoon at the TransAlaska Data Systems corporate offices – which I had learned that day was nicknamed the “Death Star” by our employees. Jon greeted me and asked, “How did the day go?” I smiled and let Jon know that my impression was some of the employee attitudes seemed like they “would have to get better to be bad.” After a good laugh, we sat down for the next few hours with a stack of interview notes, and a well-worn Scott McMurren article from Alaska Business Monthly on survival. We exchanged views gathered from our ten years of experience and opinions on the current state. We then outlined the seven steps we would follow to get the business back on track.

Step 1 – Establish familiarity with the turnaround process by defining a plan.
We were going to make sure everyone knew that we were unusually committed to the organization – we had literally bet everything we owned on the companies’ success. Most importantly we wanted to communicate that Jon and I, and our new board of directors, were experienced with business cycles, turnaround efforts, and confident in the future.

Step 2 – Recognize reality.
Just like many organization that had missed multiple quarterly performance expectations, we needed to do our laundry and fully disclose to stakeholders the true status of the books. We knew the first sign of an impending turnaround was recognition or write-down of all:
• Under-performing initiatives,
• Over-valued assets, and
• Hidden unreported expenses.

Our borrowing base formulas with the bank posed a logical barrier to an overzealous effort at marking our assets to value. Notwithstanding borrowing base management concerns, a very large asset write-down and full disclosure to all concerned was the right start at establishing credibility with our new board, financial stake-holders, and employees. And an accelerated depreciation schedule would take care of the rest. One additional benefit would be that our true performance would be reflected in each new financial report going forward.

Step 3 – Most importantly, get control of cash.
We had to stop the hemorrhaging of cash. Bold action was needed immediately. Jon and I decided on three principles to our cash control program.
• The reduction of our salaries and the elimination our management bonuses would precede any further reductions in staff.
• Any reductions in staff would be deep and one-time, and when possible the changes would focus on performance and those with unsalvageable attitudes.
• A comprehensive expense reduction plan would be put into place.

To establish the reduction objective, all programs and locations, including “sacred cows”, were to be reviewed carefully. Expense reductions were going to require:
• Combining accounting and administration into one department for all locations,
• Consolidating warehouse locations,
• Renegotiating all leases,
• Review of all contracts and discussions with all vendors,
• Restructuring the benefits programs,
• Collapsing management levels,
• Merging, centralizing, or eliminating some practices, and
• Once we were fully engaged up-market, getting out of the retail business altogether.

We knew that unless the hemorrhaging of cash was stopped, the firm was still heading to the brink.

Step 4 – Raise cash.
We were making every effort to quickly put the 1.1M bank line of credit in place and execute the GCI loan for 400K. Together these loans would improve the borrowing base and cash on hand, and support our sales objectives.

Moreover, we were going to work our internal sources and uses equations by:
• Improved billing and A/R disciplines to correct the 75 day DSO condition (i.e. Collect early),
• Increase trade credit (i.e. Gain terms to pay vendors late and put more on trade credit),
• Explore sale-lease backs to produce a capital infusion on internally deployed assets, and
• Outsource sales process to consume less working capital (for example – PC manufacturer and reseller programs would soon emerge that would reduce working capital requirements in Higher Ed and K-12, and other institutional accounts).

We further planned, if necessary, to approach a list of investors on a secondary offering. We knew our firm would remain on the edge of failure unless adequate cash was raised and solid creditor agreements produced an effective level of working capital.

Step 5 – Recover credibility with associates, investors and creditors.
We were intent on accomplishing everything we said we would when we said we would. This started with the discipline to make only commitments we could keep. One objective was to deliver on time the aging reports, financial reports, ratio stats and payments to creditors. Another was to drive A/R and inventory down. We also knew of two slam-dunk initiatives we could promote to establish a pattern of promises made and met: loan agreements and a new office location.
• Loan Agreements
Since we were within a few months of executing new credit agreements, we would state to our associates we were making every effort to close these loan agreements. Once these were closed, we knew there was value in the announcements of our success to the workforce. The dourest of our business partners, the banker, and a savvy telecom company were expressing confidence in our business plan with these loans. That would make a powerful statement to even our most skeptical associates.
• New Office Location
We were 120 days from relocating to new office facilities. We would announce our intent to find and execute a new 10,000 square foot office lease in a highly desirable section of the city. Leases of this nature would only be provided to a creditable firm. An impressive new office would be a tangible statement to clients and competitors that we were committed for the long term and planning to grow. An upscale lease would significantly impact employee esprit de corp. All of our Anchorage associates would soon be under one roof. An outdoor changeable-letter sign would not be part of the new image.

And we identified two far-fetched goals that would motivate our associates and disclose our primary strategic objectives. We were moving our focus up-market, and we intended to emphasize IT service revenue.
• Our target market was going to shift to corporate and institutional accounts —
We intended to pursue and capture the largest and most prestigious client relationships in Alaska, including British Petroleum, Arco, the State of Alaska, the Department of Transportation, and the University of Alaska. Our first step would be to put every bit of our effort into the State of Alaska and University of Alaska bids. And we would express confidence we were going to be highly competitive in enterprise and institutional accounts, and would win our share.
• Our emphasis was going to change to IT service delivery
We were going to get organized around selling and delivering IT services to large accounts. We were confident we could show progress on both of these objectives.

Step 6 – Work to show a profit.
We began to identify the overlooked positives in our organization. We looked for programs that competitors and peers had successfully implemented. And we immediately began to take these steps:
• Recruit back key associates we had lost that would drive revenue,
• Retain the key associates who were considering departure,
• Add new practice opportunities,
• Create more effective business process, and
• Focus management’s attention on closing the largest accounts.

Step 7 – Execute. Execute. Execute.
Jon and I knew we needed to produce action and measurable results on a short set of priorities. It was our job to communicate, allocate limited resources, deliver our attention to these high profile objectives, and close the gap between early and late adapters of announced change with personal promotion. On achievement of measurable results, we were committed to rewarding those that made the difference. We wanted to make execution an organizational habit, ensuring implementation predictably followed announced change.

These seven steps were not invented by the two of us. We were following a process that corporate managers are trained to apply to underperforming entities, and any number of business authors had described. This sequence of action is so predictably employed that it is the basis for investor models that are used to pick value investments such as the “Dogs of the Dow” or “Dow-Dividend” approach. The “value opportunities” in the Dow 30 are obvious; as the share price declines, the dividend will grow as a percentage of the share price. Calculate the five or six highest dividend yields in the Dow 30 to identify the value stock picks. Investors know these under-performing firms will face unrelenting pressure for management action from shareholders and directors, and follow a very similar sequence to improve the firm’s performance. If not, the directors will eventually replace the leadership, or the shareholders the directors, or the market the firm.

The obligation is the same for the principals and executives of smaller enterprises. Instead of public shareholders and bondholders, the requirement to act emanates from the stake-holders of the small enterprise:
• The principals, investors, and board members,
• The vendors,
• The bank and other lenders, and
• Career minded employees.

Jon and I understood that if we did not take action, less familiar business professionals would do so on a “post-petition” basis. However, then it would be accomplished with less understanding of the circumstances, less experience with the firm, and less empathy for the employees. We had to step up, get the job done, and by doing so earn the confidence of the team.

We stepped back from the brink by: (1) Assembling an experienced team, (2) Disclosing to stakeholders the true status of the books and getting the accounting corrected, (3) Gaining control of cash, (4) Raising cash, (5) Recovering credibility with associates, investors and creditors, (6) Working to show a profit, and (7) Executing our plan. The economy soon recovered, and the key employees regained confidence in the organization and each other. This core group of associates was instrumental in building the company from a firm on the brink into the regional leader. Their efforts produced the critical funding source and business model used to develop a profitable, fast growth national enterprise.

©2009 Ancala Equity Partners / Timothy P. Fargo all rights reserved
Next Week: Egalitarian Ownership.

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Design the Company for the Long Term

April 3, 2009

“Nothing truly worth doing in business can be achieved in a quarter, a year, five years, or even a decade. Design your company for the long term.”
Mike Rice, dean of UAF School of Management

Mike Rice’s many gifts include an extraordinary intellect, a disciplined understanding of risk management, and an ability to look deep into the unknown. Mike built from a kit and piloted an aerobatic plane, reconditioned and piloted his Cessna L-19 “Bird Dog” (an Oshkosh award winner), and is a recognized astronomer and deep space photographer. In the 1980s, Mike’s day-job was dean of the University of Alaska Fairbanks’ School of Management. In that role, he led the school to its first AACSB accreditation. Mike also served for nine years on our firm’s board of directors.

In March, 1989, I called Mike and explained that I had all but decided to leave Unisys for an entrepreneurial opportunity. I was hoping I could get his feedback before I took the final step. Mike replied, “Tim, let’s not do this over the phone; catch the first flight up to Fairbanks tomorrow and we can visit at length here on campus.”

The next morning, I arrived at the dean’s office well before 8 am. Mike greeted me enthusiastically, but he didn’t extend a hand to shake; his sleeves were rolled-up and his hands were deep into his bleeding-edge color printer. This early color technology used a heat transfer method that had left his office with a scent of melted crayons. While he tinkered, we quickly discussed the impact that color had in a world of grayscale. “I am suffering the inconveniences of early color adoption,” Mike said, “because it is my job to be persuasive. Color differentiates, and in business or a budget competition, differentiation matters.”

As Mike wiped his hands with a towel, he asked, “Tell me all about this idea of yours.” I stayed at a high level, “Jon Peacock extended an offer; 50% ownership of a business with $9M in annual revenue. I have put some of the details in this document, but the analysis only goes so far when there are many unknowable variables. Emotionally, it is hard to leave Unisys after a decade. Yet, I’m not sure I can refuse the offer.”

Mike thumbed through my supporting documents, and then laid the package down. “We may find more in conversation than in this hard copy. Give me some background on the transaction.”

I explained the long-distance telephone company, GCI, had settled their legal case against Alascom, which produced an infusion of cash. The GCI leadership was using their proceeds to expand their communications services, and they made an offer to buy TransAlaska Data Systems. However, they were not interested in TDS’s computer store division. As a result, Peacock structured a three-party deal to acquire the carved-out MicroAge stores. The working capital seemed in order. National Bank of Alaska agreed to provide a $1.1M borrowing base using AR and inventory as collateral; and GCI agreed to extend a $400K loan. Jon and I would soon execute the stock purchase and loan agreements, and personally guarantee up to $1.5M in debt. Mike listened, and waited for me to come up for air.

“Tim, recap your high-level plan, but in your thumbnail description answer these three questions: What business are you going to be in? What type of clients will you engage? And what is it that those clients value?”

With a level of enthusiasm, I summarized our intent was simply to provide IT hardware, software and managed services to businesses and institutions in Alaska. Our plan was to rapidly de-emphasize our retail presence. We were convinced that connected, open architected IT solutions were going to supersede proprietary IT systems. We were determined to focus our efforts up-market, and emphasize IT service delivery. The target market, I asserted, valued the process improvement and productivity gains that were enabled by technology. Our firm would be positioned as an extension of our client’s IT resources, and therefore we would provide faster access to process improvements and productivity gains. I added that our cost structure would allow our price to undercut the proprietary solutions vendors.

Mike nodded his understanding, and added, “I sense your enthusiasm – and frankly, I think you have already decided to take the leap. What stands out about your description is you have selected an industry that has the potential for a decade or more of high double-digit growth.”

“Now” Mike said, “Let’s talk about more important details than your current business plan. What kind of business do you want to build? Are you building a small business that is intrinsic to your lifestyle? Or are you focused on developing a scalable business model and increasing shareholder value? A lifestyle business focuses on absolute principal control, is built around and dependent on the personas of the principals, and the objective is income maximization. Alternatively, building share value through development of a highly scalable model is an entirely different journey. For instance, that type of business will not be advantaged by absolute control. Before you start developing a plan to build your business, you have to decide what you intend to build.”

I responded that I assumed Jon and I both intended to optimize share value and build a scalable model.

Mike suggested, “You two need to spend time exploring the virtues of each alternative, and then make a choice.”

Then we discussed the structure and leadership. Mike knew both Jon Peacock and I very well. Yet, he asked me, “How well do you know Jon?”

I started by saying that I knew Jon only briefly, but it seemed recently we were bumping into and hearing about each other everywhere we went.

Mike smiled and said, “Despite the efforts of many, it took you guys long enough.” Apparently our meetings were not happenstance — Allan Johnston of Wedbush Morgan, Marv Andresen of UAF, and Mike had been trying to get us connected for some time.

I went on to say I knew Jon’s background and met his family.

Mike let me know his question was trying to get to a different matter altogether. Mike explained, “The principals of a start-up are much better off if they are each experienced, competent, well-networked, and have common principles, work ethics, and values. You both bring that to the mix. What is interesting about you two is your distinct, complementary skills will lead to a natural division of roles and responsibilities. As critical, you must have the discipline to avoid the partner conflicts that destabilize a business.” Mike shared that he knew many businesses destroyed by the principal’s inability to manage differences. Mike finished, “Give each other lots of space on insignificant issues. And remember, most issues are insignificant.”

The subject changed. “Tim, it must feel pretty good to think that you may soon be your own boss?”

I agreed whole heartedly.

“Well then.” Mike said, “You may not much like my next recommendation. To paraphrase an old legal bromide, ‘A principal that elects himself as the sole board member has a fool for a director.’ Now that you two have achieved a position of controlling ownership of a small enterprise, vote your shares and constitute a board of directors. And I would not add your paid professionals to the board. Find well-networked board candidates who have experience and distinct areas of expertise – who will express their opinion. The benefit is you and Jon will leave the day-to-day tactics once a quarter, and consider the strategic issues that will better ground the tactical execution. The process of preparing for your quarterly board meeting will be an advantage; knowing that you will be vetting material issues and ideas to a group of directors will clarify the mind. The board meetings will add a healthy level of accountability to the performance objectives outlined in the prior meeting.”

We turned our attention to the importance of articles of incorporation and bylaws. “Tim, nothing truly worth doing in business can be achieved in a quarter, a year, five years, or even a decade. Design your company for the long term. Common principles, work ethic, values along with distinctively different skills and separate but coordinated areas of focus can create a long honeymoon, but these are no substitute for a well “constituted” corporation. Two principals each owning 50% of the common stock with an unadulterated set of articles and non-cumulative voting means you will reach consensus on material decision. When minority shareholders are introduced, super-minority rights in the articles of incorporation are the next step to maintaining an apolitical leadership environment. A good constitution will keep everyone constructively focused on the market; success in part will come from time over market. Longevity happens by design.” As Mike talked, I took a lot of notes.

Finally, we discussed capital requirements. Mike started by saying, “I was glad to hear that you guys believe there is adequate working capital. That is most critical. The business is highly leveraged, and the AR portion of your borrowing base will programmatically fluctuate with sales. There will inevitably be sales disappointment curves that affect working capital. Here is just a small piece of advice: a small enterprise runs on the sources and uses of funds statement, not the P&L statement. At this juncture — cash is much more important than profits. Cash is king. Get a good handle on what preserves liquidity – what causes cash to flow in faster and flow out only when necessary. Get rid of assets that convert to cash, unless these serve a better purpose on your borrowing base equation. And see if the bank minds if you are a week early or a few weeks late with the aging report. In humor and borrowing base management, timing can be everything.

I flew back that evening and met with Jon Peacock the next day. We covered a list of items ranging from (1) lifestyle versus shareholder value, (2) division of responsibility, (3) structuring a board, (4) designing the corporate constitution, and (5) working capital and cash preservation. Jon Peacock had a similar list, and we quickly realized we were already in full agreement before our conversation started. I left Unisys, and we soon closed the stock purchase and loan agreement with GCI/TransAlaska, and the loan agreements with National Bank of Alaska. I immediately called the first name on our board candidate list, and Mike Rice accepted Jon and my invitation to be our first director.

©2009 Ancala Equity Partners / Timothy P. Fargo all rights reserved
Next Week: Recovery from the brink.

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Deciding When to Launch

March 22, 2009

“Business is conceptually easy: Buy low, sell high, collect early, pay late.”
Craig Floerchinger’s opening line at an AIS training course

In south-central Alaska, the Gulkana River flows into the Copper, and eventually drains into the Gulf of Alaska south of Cordova. There is a 47-mile stretch of the Gulkana that is reserved for rafters and canoeists. In June and July, the Gulkana River is teeming with a combination of rainbow trout, Arctic grayling, Copper River king salmon, and red salmon. Not far from the river banks, massive bald eagle nests are easily spotted in the trees. The nesting partners take turns perching on the spruce branches that line the riverbank, searching for the salmon that swim upstream to spawn. This run of class I to III rapids starts with a hard row across Paxson Lake, and finishes with a slow float to the Sourdough campground. The upper reaches of the river traverse rolling valleys and vertical ridges of arctic boreal forest. At mile 23, the roar of the water builds anticipation of the falls to come as the river drops into a narrow canyon of class III and at times class IV rapids. Eight miles below the falls, the class II rapids dissipate, and the river begins to meander again. Here, as the river leads to the confluence with the West Fork and beyond, the shores of the lower reaches of the Gulkana frame the 14,000 foot glacier-covered summits of the Wrangell range.

In July 1988, Professor Marv Andresen and his wife Pat, my newly-expectant wife Cindy, and our two young sons and I spent five days rafting down the Gulkana River. Marv and I worked together on UAF’s successful $400,000 computer laboratory grant. In addition to being a UAF School of Management professor, Marv was an oil well investor, an athletic club principal, and Alaska’s top racketball player in his age bracket. On numerous runs down the Gulkana together, Marv also worked on my whitewater rafting skills.

A few days into the adventure, after a long day on the river, Marv and I were “anchoring” the rafts by pulling the bows higher up on the gravel bar, checking the tautness of the rowing frame straps, and topping off the inflation levels. While we worked, Marv asked how I thought things were going in the IT industry and at Unisys. I indicated my team was having a spectacular year in Alaska, and then I delivered a rote opinion of my company’s position — straight from my latest briefing. When I finished, Marv looked puzzled and said, he “wasn’t so sure.”

He then explained he was sensing a fundamental shift in the IT industry. The PE ratios for IBM, Burroughs/Unisys, NCR, CDC, Honeywell, Data General, and DEC all indicated performance challenges. Mergers of underperforming firms were occurring; cost reductions and layoffs were continuing to be announced across the IT industry. Even IBM’s vaunted “no layoffs” rule was rumored to be under pressure. Marv described that he could go into a computer store in Fairbanks most evenings, and their staff was over-run with professional clientele. He described a seemingly endless tech book section at a Seattle bookstore with almost no coverage of the old industry players beyond HP and IBM. Information technology control was changing over from the few to the many. “Proprietary” closed systems seemed to be rapidly giving way to open standards. Networking products were allowing printer and file sharing, communication, and collaboration. Enabling technologies like spreadsheets and data file applications were eliminating some tasks that not long ago required a programmer. The industries’ legacy firms were not leading the change. The cultures of the these IT firms were slow to embrace the new order of “open”, “easily accessible”, and fast to market. Even IBM’s good start in the PC industry was in a state of challenge: OS/2 was late and struggling to gain acceptance, and IBM was again late with their 386 announcement and losing share to Compaq. For these reasons and others, Marv felt strongly the IT industry was at a classic inflection point.

As we sat on the edge of the raft, I begin to get a sinking feeling about my company’s positioning in the market. Then Marv asked a more difficult question. “What do you see happening with your career over the next few years?” I responded, “My guess is at some point in 1989, Unisys will move me to the Bay Area.” Marv immediately changed direction with, “Do you know Jon Peacock? Jon is basically running TransAlaska Data System’s MicroAge division.” I replied, “Is he the executive that has a Ph.D. in computational chemistry?” Marv nodded and added, “I wish I could find a way to get you and Jon together. You two complement each other’s natures and skills, and would make a powerful team. Additionally, you are in the markets he must pursue, and you understand the service delivery processes he needs to develop. Jon has the technologies you need to embrace, and expense structures that make more sense.” I expressed that I wasn’t so sure that an entrepreneurial adventure in Alaska’s protracted economic decline was a good idea. Marv explained, “Economies always recover. Weak players will present opportunities for acquisition. The first half of a good transaction is buying low. Coming out of this recession, a team with an ability to solve business problems could build market share, and real value.”

I wasn’t convinced, so Marv decided to tell a story. “Tim, on our last journey down the Gulkana we talked through the fundamentals of whitewater rafting. Whitewater rafting at first is a bit counter-intuitive. It certainly isn’t about pointing the bow where you want to go, downstream, and using your oars to get you there. In fact, that would be a disaster. Instead you point the bow toward the shore, the most obvious obstacle you are trying to avoid. A raft is to the river’s current as a sail is to the wind — so instead you use your oars to position your raft to the river’s current. Finally, in whitewater rafting you try to anticipate three or more obstacles ahead. This means you position your raft to solve the second and third problem, not just the first. This is done by maneuvering forward and back, executing a pirouette, and scissoring the oars to point the bow briefly downstream to thread a needle or ride a rooster-tail. Executed effectively, one S-curve can effortlessly position your raft for the next; and you and your crew will successfully avoid the rocks, the holes, and sweepers.”

Then he brought the lesson home. “Most successful service businesses are about positioning effectively to the market and addressing obstacles to growth and profitability. The largest and most obvious risk, business failure, is actually no risk at all if your timing is right, you have a plan and good team that can execute, and adequate capital. There is a significant opportunity now. Information technology is going to touch every process of every business and institution. IT will be more open, more connected, and more accessible. The new industry leaders driving this agenda are already emerging. The successful service entrepreneurs will discern what the marketplace has voted for quality, excellence, performance or value. The shape of the price curves as the industry moves from proprietary to industry standard are known: Product prices will decline, and services rates will go up. Firms with project management and technology skills that can catalyze change for their clients will be in high demand.”

Marv wrapped up his case. “You are 31 years old, have what seems an unlimited font of energy, and an overabundance of confidence. You have apprenticed for nearly a decade working for a Fortune 50 firm. You are a risk taker — an intrapreneur. While doing so you have learned from failures and successes, and developed the necessary level of business maturity. Don’t underestimate the opportunity found at the end of a deep recession and the beginning of an industry shift.”

We went back to tightening the belts on the rowing frame. Professor Andresen’s message to me was clear: the time was now. All I needed was a business plan, access to capital, and the right partner.

©2009 Ancala Equity Partners / Timothy P. Fargo all rights reserved
Next Week: Designing the company for the long term.

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The Beginning of the End-Game

March 15, 2009

“Even the violent end, the matador on his toes, sighting along his blade, the drop of the cape, the sword buried in the bull’s shoulder to the hilt, the blood on the sand…had a strange, primordial attraction…”
Sometimes the Bull Wins

In late May 1997, our board held a meeting at the Willard Hotel in Washington DC. Board member Bob Hatfield, the former president of the Alaska Railroad, had traveled more than 20 hours to DC from Belo Horizonte, Brazil. The logistics of attending our board meetings were challenging from his new home in Brazil. For years a disciplined attendee and valued contributor, he had missed the prior two board meetings. As the president of a Brazilian railroad, Hatfield was wrestling with a new role, a new culture, and Brazilian Portuguese. As we gabbed away prior to the board meeting’s start, a usually expressive Hatfield stared in silence at his talkative associates with an uncharacteristically blank expression. When I finally asked, “Robert, are you all right?” he deadpanned, “I hadn’t heard this much of a familiar language spoken in months…I’m just adjusting to my ability to comprehend!” Then out came Hatfield’s hearty laugh, and the reunion was on.

It was an exceptional moment in the history of our firm. The information contained in the preliminary board packet was all up beat. Led by one of our best executives, our host branch delivered an outstanding presentation. The rest of the agenda was full of good news. We had paid off a convertible subordinated debenture early. The launch of our sixth and newest branch had begun in earnest, and our seventh branch was on the drawing board. Our quarterly results were strong, and our financial position excellent and getting better.

Moreover, I had a big announcement to make. Our franchisor’s newly emplaced president had approached me with a serious entreaty to immediately begin negotiations to buy our firm. This was fabulous news for the board. Although we had long been interested in being acquired, we sensed it was important that they approach us first. Historically we had been one of their most award winning and most closely allied franchisees. Yet, our franchisor had now clearly prioritized the acquisition of firms less affiliated. For over a year they had been forward integrating into our channel, and had not expressed a recent interest in our firm. We began to believe that in our franchisor’s view, our effective relationship had made our firm a low acquisition priority. Why should they buy an alliance that they already controlled?

In the months preceding this meeting, we had worked out a set of steps to change the status quo and unsettle the relationship. First, in a low key but obvious fashion, we developed a plan to go public and began to execute systematically on the plan. Then we opened our two newest branch offices in markets where our franchisor had major initiatives: the first adjacent to one of the franchisor’s owned-branches, and the second near one of the franchisor’s financially sponsored locations. After that, we leaked that we had engaged our franchisor’s competitors in a bid process to determine our primary source of supply. Our last step was to dramatically eliminate their conversion options by paying off our subordinated debentures early; thereby limiting them to a 19.9% minority stake in our firm. With each step, we reaffirmed our relationship, but acted increasingly disaffected. However, the bravado aside, our stratagem of visiting this sequence on the relationship seemed as if it was having little to no effect. Worse yet, we were running out of ideas to give them cause to initiate the acquisition conversation.

Just at the point we had become concerned, our franchisor made their move. We now had our Letter of Intent and would soon be deep in negotiations. To further unsettle our franchisor, after they announced their interest to buy our firm, we recommended that their board seat be temporarily vacated. We argued that there were potential conflict of interest liabilities if that seat remained filled during acquisition negotiations; and they agreed.

As we walked through the discussion and decisions at the Willard Hotel, our board was visibly delighted with the news. With negotiations now ready to move forward, it was clear our firm was on the brink of its greatest opportunity. We knew also that we had our most difficult challenge ahead — fighting through an exit game with a Fortune 500 firm’s executive team. Nevertheless, that would all wait for later. We could not help but savor the moment.

After a rigorous strategy session with the board, that night at Sam and Harry’s Restaurant, all spouses and board members settled into a private room. Sam and Harry’s signature service took over. The meal was spectacular and the conversation a raconteur’s delight. Frank Danner was delivering one witty tale after another, and Bob Hatfield was not far behind. Susan Hatfield joined in with her humorous stories. The tears of laughter were flowing as well the wine.

Sam and Harry’s assigned a maitre’d to orchestrate the service for our private dinner. He was excellent, and his wonderfully thick French accent added a distinctive charm to the service. In the midst of all the fun, I noticed our maitre’d’s behavior. During an anecdote by any dinner guest, he seemed to drag a leg to stay in the room. He would find a fork to move, napkin to pick up, or wine glass to fill — until a punch line was delivered — then he would dash out quickly and return before the next story began. I finally caught his timing, and asked if he “enjoyed a good humorous story?” His eyes lit up, and he impishly said, “May I” as he pointed to the front and center of the private room. Then our maitre’d, with the encouragement of the entire room, took the “center stage” and told this wonderful tale…

“An American, who enjoyed exploring cultures and custom, was visiting his Spanish business client in Pamplona. He was invited to join his friend on a balcony at the Plaza de Toros, the bullring, for an evening of the “National Sport of Spain.” At the bullfight, the American was caught up in the pulse of evening; the enthusiasm of the crowd, the choreographed tradition of the battle between man and beast, where the grace and courage of the matador was juxtaposed against the raw power and animal instincts of the bull. Plaza de ToroEven the violent end, the matador on his toes, sighting along his blade, the drop of the cape, the sword buried in the bull’s shoulder to the hilt, the blood on the sand…had a strange, primordial attraction that the American visitor could not begin to explain.

The Spaniard recognized in his friend and client a passion for the sport that escapes most American attendees. In recognition, he invited his American guest to a very exclusive “after-fight” celebration, “Los Festejo de los Aficion,” at the famed Hotel Montoya. The dozen or so select guests, aficionados, were invited to a special banquet room. Once there, the superb preliminaries led to the grand main course.

However, when the servers arrived, the American was shocked. The main course looked awful, and over-large, and the course hung over the serving platter gracelessly. His Spanish friend explained that at this traditional meal, the cojones of the “defeated one” were served. The American braced himself. Yet, on tasting the main course he found it was most delicious. He asked for seconds…and then thirds. Relieved, the Spaniard honored his friend with a toast and an open invitation to return to Pamplona at his pleasure — to the Plaza de Toros and to Los Festejo de los Aficion.

A year later, the American returned to Pamplona accompanied by the president of his firm. He could not get the fights and the “after-fight” celebration out of his mind, and built his travel partner’s anticipation as he raved about this strange and wonderful traditions of the ring and the exotic food. Travel delays prevented their attendance at the first night of bullfights. Fortunately, the Americans still had the after-fight celebration at the Hotel Montoya to look forward to.

Upon arrival at the Montoya, they were shown into the exclusive dinner gathering, where their Spanish host was most gracious, and the aperitifs prepared them for the preliminary courses that followed.

Finally, the main course arrived. Once served to center table and the covers were removed from the platters, the American guests were taken aback. Instead of the overlarge, “hanging-off-the-platter” main course, the course was very small, smaller than a large fisted-hand, and certainly not enough to feed the dozen guests. Disappointed, the American said to his Spanish host with concern, “What is this?” And then the Spaniard, shrugging his shoulders, gently explained, “I’m so sorry, but…a veces gana el toro…sometimes the bull wins.”

On the delivery of the punch line, our room erupted in laughter. Even with all the merriment, the relevance of this story struck me. Throughout the evening, the inescapable subtext was that our most formidable business challenge – the exit process – lay ahead. We knew we would have to contend with an ominous mix of elements. While our potential acquirer waved in front of us this entreaty of acquisition, their policies and actions were increasingly aggressive and a risk to our firm’s welfare. By their forward integration, our franchisor, our market partner, was quickly becoming a direct competitor. We had been left no choice but to counter their moves and demonstrate we posed a danger. It seemed clear that we had entered a choreographed competition, the business equivalent of the Plaza de Toros. The maitre’d’s story became our metaphor. Much like the bull facing the matador, we knew if we tired, our franchisor could soon be sighting along their blade, and dropping the cape.

As the evening was ending, I stood, raised my glass, and proposed a toast, “To the bull — because at times the bull wins.” Then, all those around the table responded enthusiastically, “To the bull!” In the end, the maitre’d’s anecdote was prophetic.

©2009 Ancala Equity Partners / Timothy P. Fargo all rights reserved
Next Week: Back to the beginning — positioning to the current.

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